Attorney General Lockyer Unveils Reforms to Toughen Nonprofit Accountability, Fundraiser Controls

(SACRAMENTO) – Attorney General Bill Lockyer today unveiled legislative reforms to strengthen accountability and oversight of nonprofit organizations and commercial fundraisers by setting new audit requirements, strengthening governing boards’ control over executive compensation and solicitation campaigns, and barring unapproved fundraising payments to celebrities.
“The vast majority of charities provide valuable, needed services to our communities and do so in a manner that complies with the law and basic principles of good governance and sound financial management,” said Lockyer. “But our own investigations and developments across the country show that bad actors are giving nonprofits a black eye. These reforms aim to help charities and the people they serve, and shore up donor confidence in charitable giving.”

Lockyer’s reform package will be carried in the Legislature by Sen. Byron Sher, D-Stanford. “I’m extremely pleased to have a lawmaker of Senator Sher’s stature shepherd this important legislation,” said Lockyer.

The reforms would require large nonprofits with gross revenue of $500,000 or more in any fiscal year to prepare annual financial statements audited by an independent certified public accountant. Charities would have to make the audited financial statements available to the Attorney General’s Office and members of the public. Audited financial statements prepared independent of the requirements imposed by Lockyer’s proposal also would have to be made available to the public and the Attorney General’s Office.

Under the reforms, nonprofit corporations that meet the $500,000 threshold would have to establish and maintain independent audit committees, a provision similar to a requirement imposed on for-profit companies by the federal Sarbanes-Oxley Act. Members of the nonprofit’s finance committee and staff – including the president or chief executive officer (CEO), and treasurer or chief financial officer (CFO) – would be prohibited from serving on the audit committee.

“By providing more accurate, detailed and useful information about nonprofits’ finances, independent audits will enhance the ability of governing boards and the Attorney General’s Office to assess charities’ operations and flag potential problems,” said Lockyer.

A second major aspect of the package strengthens regulation of commercial solicitation campaigns conducted on behalf of nonprofits. These provisions largely grew out of Lockyer’s investigation of Hollywood fundraiser Aaron Tonken, who failed to register with the Attorney General’s Office as required by law.
Lockyer sued Tonken in March 2003, alleging he defrauded charities and their donors, diverted donations to bank accounts he controlled and refused to account for more than $1.5 million in contributions to six charitable events he agreed to produce. Lockyer’s reforms would require commercial fundraisers, within five days of receiving donations, either to deposit the funds in a bank account controlled by the charity, or give the money directly to the charity.

The Attorney General’s investigation of Tonken also revealed he provided celebrities millions of dollars in cash, gifts and travel to appear at charity fundraising events. The reforms would prohibit such payments without prior, written approval from the nonprofit’s governing board or CEO.

Lockyer’s package also would bar nonprofits from hiring commercial fundraisers who are not registered with the Attorney General’s Office. Additionally, charities and commercial fundraisers would have to enter written contracts for each solicitation campaign. The contracts, among other provisions, would have to specify the charitable purpose of the campaign, the fundraiser’s fee, the restrictions on payments to celebrities and the requirement that donations be turned over to the charity or its controlled bank account within five days. To aid enforcement, the contract would have to be submitted to the Attorney General’s Office at least 10 working days prior to the start of the campaign.

The reforms also would require commercial fundraisers and nonprofits to provide more detailed disclosure to potential donors about fees paid to commercial fundraisers. If asked, the commercial fundraiser or charity would have to disclose: the amount of the paid solicitor’s fixed fee, and what percentage of the total donations the fee would represent; or the fundraiser’s percentage fee and how much of the total donations the charity would retain after subtracting the fee.

Under other reforms in the package, people soliciting money for charitable purposes would be barred from engaging in certain deceptive acts. The prohibited conduct would include using a symbol associated with a nonprofit without permission or using a name so similar to that of another organization that it would deceive donors. Additionally, solicitors could not say that tickets for an event will be donated for use by others unless a charitable organization had agreed to accept a certain amount of tickets. The total number of donated tickets could not exceed the lesser of the total commitments received from charities or the capacity of the event site.

Revelations of excessive compensation and benefits provided executives of foundations and other charitable organizations spurred another proposal in the reform plan. Under this provision, the governing boards of foundations and other nonprofit entities would have to review and approve at least annually the compensation and benefits paid to the president or CEO, and the treasurer or CFO.

Lockyer stressed the objective of his reform plan was to help nonprofits. “Everybody wins – charities, donors and the community – if nonprofits and fundraisers operate lawfully and soundly, and are subject to effective oversight,” said Lockyer. “These reforms help achieve those goals.”